US Market Outlook For Week 30th March 2008
State of US Economic & Monetary Trend The FED Governor: Approach/Strategy:- Challenges (Subprime Loan Crisis): Avoid A Recession While Steering Clear Of Bailing Out Those Who Made Risky Investments. Dilemma: The Fed Has A Dual Mandate To Foster Maximum Sustainable Growth And Stable Prices. It Also Acts As A Lender Of Last Resort. In The Short Run, The Fed Can't Do All Three. They Have To Insure The Growth Side. They'll Get Back To Inflation Later. Fed Fund (Overnight Loans Between Banks) Rates as at Feb 2008: 3.00%. Fed Discount (Direct Loans To Banks From Central Bank) Rates as at Jan 2008: 4.75% The Fed's Statement & Moves:- The prospect of a more aggressive Fed translated into a higher risk of inflation. Bernanke's pledge to 'do the best we can for the US economy' confirmed the expected 'phase shift' in risk assessment at the Fed away from inflation and more toward growth". With that the dollar has resumed its bearish performance against leading currencies and there have been renewed worries over inflation. Fiscal Policy:- President Bush and Congressional leaders from both political parties have reached agreement on US$150 billion in tax relief in an effort to help stimulate the U.S. economy. The New Risks In US Economy:- The Risk In The Global Economy:- US Economic Indicators … NIL. A rebound in the housing sector is the key to an economic turnaround. That may be a ways off, but Washington policymakers are helping to stabilize the market. If you're looking beyond the current gloomy economic conditions toward brighter times, you should know that any recovery must begin with housing. It's the origin of the turmoil in the credit markets, and tighter credit conditions are the biggest threat to overall growth. The bad news is a housing turnaround is still a ways off. The good news is that policy moves by the Federal Reserve, Congress, and other Washington agencies are laying a foundation that will stabilize housing and support an upturn. The road to a housing recovery is easy to map out: Firmer demand is crucial to the stabilization process, and the latest news is not all bad. The mix of lower prices and mortgage rates is helping. Consumers say home-buying conditions have been improving in recent months, based on a Reuters/University of Michigan survey. The National Association of Realtors' Housing Affordability Index, which is based on the ability of a family earning the median income to qualify for a 20%-down, 30-year mortgage on a median-priced home, hit a three-year high in January 2008. There has even been some movement in the glut of home inventories. The stock of existing homes represented a 9.2-month supply at the recent pace of sales. That's down from the high of 10.2 months from October 2007, but the normal level before the bust was around five months (Sept 2008). Washington's recent efforts will help, too, and even larger mortgage relief plans are winding their way through Congress. Several recent moves will help to restore liquidity, especially changes for Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) that buy loans and repackage them for sale in the secondary market. Regulators have temporarily raised the growth caps on the GSEs' loan portfolios, greatly increased the size of mortgages that conform to GSE guidelines, and freed up at least $200 billion in additional capital the GSEs can use to buy mortgages and mortgage-backed securities. A move by the regulator for Federal Home Loan Banks could boost their purchases of mortgage securities by more than $100 billion. Plus, the Fed's new lending facility for key securities firms will reduce the urgency for dealers to try to sell mortgage-backed securities at fire-sale prices. Greater demand for mortgage securities in the secondary market, along with reduced supply, will result in a more liquid mortgage market that will encourage primary lending to home buyers and lower mortgage rates. Housing will need all the help it can get to face down the headwinds. The stiffest may be a recession that threatens to cut further into home demand, as job prospects weaken and consumer confidence plunges. Still, with Washington pouring in unprecedented support, prospects for at least the beginning of a recovery later this year (2008) remain favorable.
Ben S. Bernanke
It Will Continue To Assess The Effects Of These Developments On Economic Prospects And Will Act As Needed To Foster Price Stability And Sustainable Economic Growth.
Most economists expect growth of only 1% to 2% for 4th 2007, with little improvement in early 2008. The risks to that somber forecast are almost all to the downside.
That is, investor fear could drive up risk premiums on all assets--not just the riskiest ones--to the point where even creditworthy borrowers cannot secure funds or financially sound companies cannot acquire equity financing.
That's the point where risk normalization becomes a full-blown credit crunch that threatens the functioning of the entire financial system and the stability of the economy (Uncertain);
Federal Reserve Chairman Ben S. Bernanke and other influential policymakers have noted that in times of high uncertainty, strong, preemptive action may be the right policy to prevent broad damage to the economy;
with a sustained supply shock resulting from a major interruption in the supply -> Inflation Pressures -> Higher Interest Rate -> Bizs Cut Capital Spending & Hiring -> Cut In Consumer Spending -> Raising Inflation And A Flagging Economy!
(Uncertain)
Housing starts have to fall low enough relative to sales that inventories are reduced to the point where people begin to expect firmer prices, a key to stemming mortgage defaults and shoring up the market for mortgage-backed securities. Getting there is the hard part. In February 2008, new-home sales fell to a 13-year low, and starts of single-family homes dropped to a 17-year low. Prices of existing homes in January 2008 were down 10.7% from a year ago, based on the Standard & Poor's/Case-Shiller index for 20 cities, and the decline is accelerating.
Against current market conditions, Fed rate cuts alone won't necessarily reduce mortgage rates. Despite the Fed's big January 2008 cuts, mortgage rates rose through mid-March 2008, as the spread between mortgage rates and Treasury yields ballooned, indicating the secondary mortgage market was drying up.
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